blockchain is eating software, the internet, data and the world.

​and it's hungry for seconds.

Recently, the SEC denied seven more Bitcoin-based ETF applications by ProShares and Direxion. ETFs have been a hot 2018 topic for cryptocurrencies, and we've written about and explained them before. Interestingly, the crypto markets didn't react all that terribly to the news, though many investors probably expected the denials since the SEC has yet to approve a crypto ETF.

Practically, though, the SEC denial doesn't mean much. Why?

Reason for Denial

The SEC based it's denial decision on the fact that BTC markets are not inherently resistant to manipulation. In other words, there aren't enough protections in the crypto markets that prevent, say, bots or exchanges from fraudulently manipulating the price.

The same logic was used when the SEC recently denied the Winklevoss's ETF proposal. The Winklevoss's (...Winklevai?) tried to minimize the risk of manipulation by working with Nasdaq, but that wasn't enough for the SEC.

So the more recent ETF proposals tried to further minimize the risk of price manipulation by basing their value on CBOE and CME bitcoin futures markets, which are regulated markets. However, the SEC still rejected this as insufficient protection from manipulation. In other words, the BTC futures markets just aren't robust and traded enough yet to trust their pricing.

Interestingly, the SEC also recognized that approval of a BTC ETF or similar investment instrument would have benefits. Specifically, they noted that it would provide investors with additional protections (i.e. by allowing investors to access BTC in a more regulated route).

Why It Probably Doesn't Mean Anything

So there's no Bitcoin ETF yet. So what?

The crypto market is so, so young. Of course it's not "resistant to manipulation" yet. A new asset class was just born, and it's going through growing pains. The CBOE and CME futures markets were launched within the last year, in the middle of a speculative bubble. No wonder their usage is low and dropping now that the froth has faded.

The SEC's denial does NOT mean that future crypto products like ETFs or publicly traded index funds will never happen. It just means the market isn't robust enough for regulators yet. Which, given the growing pains (read: scalability) that Bitcoin experienced in its 2017 surge, makes total sense.

And besides, the digital asset community should focus on the things that actually matter, like figuring out how to scale better, and how the industry should be regulated (note: "regulation" doesn't just mean "prohibit or restrict; it can also mean "enable" or "allow").

In other words, investment instruments like ETFs are probably not where we should be planting the next flag. Focusing on an ETF approval would be "form" ("an agency says the quality of BTC is trustworthy") over "substance" ("BTC is a quality asset").

Next Steps

​The SEC has "stayed" (aka, paused) the ETF denial for further review. Don't get excited, though. This is a standard administrative process, and is done because the SEC delegated the decision to staff. The higher-ups at the SEC will not review the staff's decision. More likely than not, the SEC will let the decision stand. But it's possible they could reverse it and approve the ETFs.

There are a few other SEC ETF decisions looming on the horizon (like the VanEck-SolidX ETF), but, as this whole post is about, they won't make or break the future of crypto (though there are some compelling arguments an ETF may obliterate prices for a while).

One really interesting, under-appreciated item to note, however, is that Commissioner Hester Pierce dissented from the recent Winklevoss ETF denial. This is not done that commonly. In other words, a Commissioner went out of her way to publicly state that the Winklevoss ETF should have been approved. With that in mind, it's only a matter of time before one is.

And then, of course, there's Bakkt, which may help stabilize and legitimize Bitcoin pricing. That stability could make the SEC more comfortable that BTC markets aren't subject to pricing manipulation, and more open to approving an ETF.

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Reginald Young is a licensed attorney in San Francisco, California, where he works with crypto investment funds and startups. You can connect with him here.

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